Disentangling the Roots of Audit Inspection Risk: The Effects of Inspection Focus vs. Inspection Likelihood

• In Event: 1.01 Auditor Judgment I

Abstract

Although recent research shows that auditors increase effort when anticipating a regulatory inspection, we know little about how other aspects of the “inspection risk” associated with the anticipated inspections impact auditor behavior. We posit that, while prior research has focused on inspection likelihood, inspection focus (i.e., areas to which regulators are most likely to direct their attention) is an integral component of inspection risk. To examine how anticipated inspection focus affects auditor behavior beyond the impact of inspection likelihood, we conduct an experiment that examines how inspection focus influences auditor effort, emphasis, and, ultimately, effectiveness during the audit review process. The results support our predictions that inspection risk is a function of both inspection focus and inspection likelihood, and that auditors react to inspection risk incrementally to the risks associated with the audit risk model. Specifically, we find that anticipating an inspection focal area causes auditors to expend greater effort in that area than they otherwise would, especially when an inspection is more likely. We also find that auditors shift emphasis away from non-focal areas with significant audit risk, ultimately reducing effectiveness in those areas. Finally, inspection risk reduces overall audit efficiency during the review process by increasing non-diagnostic review comments. Overall, our findings experimentally corroborate prior qualitative findings and suggest that both inspection likelihood and inspection focus are important dimensions of inspection risk.

Authors

• Jennifer McCallen, University of Massachusetts-Amherst

• Heather Carrasco, Texas Tech University

• Marcus M. Doxey, University of Alabama-Tuscaloosa

• Richard W Houston, University of Alabama-Tuscaloosa

• Yoon Ju Kang, University of Massachusetts-Amherst